Director and officer liability and corporate tax avoidance

Abstract

We use the unique nature of the director and officer liability protection law applicable to Nevada incorporated firms to study how liability protection is related to corporate tax avoidance. We find that firms incorporated in Nevada avoid 32% more federal corporate tax as a fraction of total assets than firms incorporated in Delaware, and 40% more than firms incorporated in other states. Nevada‐incorporated firms have a 15% lower cash effective tax rate and an 8% lower GAAP ETR. The results are robust to various specifications including instrumental variable and matching approaches. Greater tax avoidance is also associated with lower payouts to shareholders for Nevada‐incorporated firms. The findings are consistent with theories about the complementarity of managerial diversion and tax avoidance for firms with poor monitoring, and they demonstrate how increases in liability protection lead to the unintended consequence of greater firm tax avoidance.

Corporate tax avoidance under economic policy uncertainty. Does the quality of institutional governance matter?

“…Higher index values indicate higher levels of policy uncertainty. We find a positive coefficient on EPU 1 On the other side of the legal use of tax laws to reduce the corporate tax burden, the avoidance of taxes that involves adopting illegal mechanisms (i.e., tax evasion) may lead to various consequences for companies, including tax-related lawsuits, financial penalties, and reputational damage (see, for instance, Crocker and Slemrod, 2005;Khan et al, 2023). Moreover, while aggressive corporate tax avoidance should not generally be linked to accounting fraud (Lennox et al, 2013), firms involved in fraudulent activities might pay more taxes than necessary to avoid unwanted attention from regulatory bodies (Erickson et al, 2004).…”